Interest Rises In Leveraged Bond ETFs Ahead of Fed Meeting

The December Federal Reserve meeting is right around the corner and if Fed funds futures prove to be an accurate gauge, it is likely the central bank will hike interest rates for the third time this year. Fed meetings usually create short-term trading opportunities in an array of asset classes, including leveraged exchange traded funds (ETFs).

Specifically, the Direxion Daily 7-10 Year Treasury Bull 3X Shares TYD and the Direxion Daily 7-10 Year Treasury Bear 3X Shares TYO could be of interest for aggressive leading up to and around the December Fed meeting. The same goes for the Direxion Daily 20+ Year Treasury Bull 3X Shares TMF and the Direxion Daily 20+ Year Treasury Bear 3X Shares TMV.

TYD seeks to deliver triple the daily returns of the ICE U.S. Treasury 7-10 Year Bond Index while the bearish TYO looks to deliver triple the daily inverse returns of that benchmark. For that index, “eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of outstanding face value, excluding amounts held by the Federal Reserve. Securities excluded from the Index are zero-coupon STRIPS, inflation linked securities, floating rate notes, cash management and Treasury bills, and any government agency debt issued with or without a government guarantee,” according to Direxion.

Going Longer

Duration measures a bond's sensitivity to changes in interest rates, meaning longer duration fare are usually viewed as more vulnerable to higher interest rates.

Should the Fed lay out a course for additional rate hikes in 2018, the Direxion Daily 20+ Year Treasury Bull 3X Shares could be vulnerable while TMV, the bearish equivalent, could surge.

TMF tries to deliver triple the daily returns of the ICE U.S. Treasury 20+ Year Bond Index while TMV looks to deliver triple the daily inverse returns of that index.

Interesting Activity

Data suggest that, in recent sessions, activity has been perking up some of Direxion's leveraged bond ETFs. For example, TYD's volume for the five-day period ended Nov. 16 was more than 66 percent above the trailing 20-day average, according to issuer data. 

In a sign that some traders are expecting Treasury yields to rise, TMV has averaged daily inflows of nearly $547,000 over the past month.

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